Disney/Fox to ‘Greatly Accelerate’ Disney Direct-to-Consumer Plans, Says Iger Amid Deal Opposition

Fox has “broad capabilities and experience” in direct-to-consumer distribution that will serve Disney well by improving “our portfolio and positioning,” said Iger. Combining their direct-to-consumer “platforms” will give Disney a 60 percent “controlling interest” in Hulu. Disney, Fox and NBCUniversal each own 30 percent, Turner the rest. Disney thinks the linear “assets” it’s buying, including the FX and National Geographic channels and the 22 Fox regional sports networks, “are fully complementary with our plans to go direct-to-consumer,” said Iger: “We have always said that in our direct-to-consumer strategy or initiatives, that we’re going to remain in the business of basically being a provider of channels or programs” for MVPDs.

The company knows “a deal of this nature and a deal of this size” will get “a significant amount of regulatory scrutiny” in the U.S. and abroad, said Iger. “We believe that the regulatory authorities will look at this from a consumer point of view,” he said. “They should quickly conclude that the aim of this combination is to create more high-quality product for consumers around the world and to deliver it in far more innovative, more compelling ways.”

If the linear MVPD “ecosystem” deteriorates “to the point where it’s not as viable as we need it to be, we’d be well-positioned to, in effect, flip a switch and distribute those programs and those channels direct to the consumer through the platforms that we’ve created,” said Iger. Buying FX and National Geographic channels yields new “production capabilities” to “feed” its new direct-to-consumer offerings, including Hulu, without “creating substantially greater risk for us on the ecosystem side,” he said.

Disney sees Hulu as a “great opportunity to expand in the direct-to-consumer space,” said Iger. Owning 30 percent “was great, but having control of it will enable us to greatly accelerate Hulu into that space and become an even more viable competitor to those that are already out there,” he said. Disney will “be able to flow more content in Hulu’s direction,” he said. “Managing Hulu becomes just a little bit more clear, a little bit more efficient, a little bit more effective as a controlling shareholder rather that with equal partners.”

Since his company doesn’t yet control Hulu, it’s “premature” for Iger to speculate whether the company will increase spending on original content for the service, he said. “Hulu has been increasing its investment” in original and licensing programming, “but we’ve not determined whether we will increase that beyond what their current plans are, and we’ve got some time,” he said. Disney said it thinks it can complete the Fox buy in 12-18 months. “If we decide to increase our spending on original content at Hulu, we certainly have the intellectual property creating capabilities, far more than we did before,” said Iger.

Concerns

FCC Chairman Ajit Pai didn't comment on the deal or on media consolidation broadly except to say the agency "review[s] every transaction through the lens of public interest." He spoke after commissioners' meeting where net neutrality rule changes were OK'd (see 1712140039). Commissioner Mike O'Rielly also didn't comment on the deal or whether the FCC would have a role in review, saying there needs to be a better analysis and definition of the media market. Rather than competition limited to silos, like FMs competing among themselves, "it's a war where everyone is fighting against everyone and that includes all the technology companies," he said.

DOJ should "thoroughly examine the incentives and power" that New Disney would have to hurt competition and consumers, Public Knowledge said. It said New Disney potentially would be able to charge MVPDs and virtual MVPDs more for Fox content. It called the RSNs' buy "a cause for concern" since those added to ESPN would boost Disney bargaining power over MVPDs and open the door to New Disney having more power to negotiate higher prices and more preferential treatment for its other video programing. New Disney would have "unprecedented control over both national and local televised sports," PK said. ACA said Disney/Fox could use its programming assets "to undermine competition to the detriment of consumers."

Disney is “largely looking” at the acquisition of the regional sports networks as “a perfect complement” locally to ESPN’s “current offering” as a “national program service,” said Iger. “We are not currently anticipating a substantial value proposition in terms of the direct-to-consumer aspect of ESPN because the regional sports networks will primarily be distributed as they have been distributed” by MVPDs, he said. If there develops later “an opportunity” to bring the regional sports networks into ESPN’s direct-to-consumer business, “we’ll take full advantage,” he said.

There are "significant" antitrust concerns, Writers Guild of America West said. It said the two long profited "from the oligopolistic control" enjoyed by major media conglomerates over the entertainment industry, and it "will make matters even worse by substantially increasing the market power of a combined Disney-Fox."

Seller's Strategy

Twenty-first Century Fox “will split a group of related core businesses into a separately traded public company, which for now we’ll call New Fox,” said Chief Financial Officer John Nallen on another Thursday investors call. New Fox will be “a leading provider” of live news and sports that’s “most relevant to viewers,” including Fox News and Fox Business, the Fox broadcast network, Fox-owned and operated TV stations, FS1 and FS2 and the Big Ten Network, the CFO said.

Fox RSNs are being sold “because we were really mindful of what the fit was,” CEO James Murdoch said. Both companies “are in the sports business, and it was really a question of where the best fit was and also what was really going to generate the most value,” he said. Executive Chairman Rupert Murdoch said keeping the RSNs would have created a “huge tax burden” for the New Fox spinoff.

Wells Fargo arbitrage analyst Paul Young wrote investors the deal likely would close in 2018's second half.